The Do’s and Don’ts of Business Rescue

It has been nearly eight years since business rescue has been introduced into our law. The general view is that probably less than 20% of the companies which go into business are rescued. However, business rescue is on an improving trend as the business community learns how a rescue operates with its advantages as opposed to liquidations. With South Africa officially now in a technical recession, more companies will be considering their options under business rescue.   

If you are a director of a financially distressed company and are considering business rescue there are some important do’s and don’ts.

Get your timing right and don’t delay. Your company could move from a company that could be rescued to one where liquidation is the only option. Whilst always a difficult timing call to make by directors, avoid emotion, consider realistically your financial outlook and what is best for the company and its stakeholders.

The directors are best placed to understand why the company is financially distressed and how it can be rescued. There must be a basic plan or idea how to rescue the situation, whether it be to increase turnover, find new markets, cut overheads or find an equity investor. The business rescue practitioner, when appointed, will develop and bring the plan to life but the ideas often must emanate from the directors. If there is no plan on the horizon then liquidation may be the only option.

Appoint the right business rescue practitioner for your company. One who has experience in the industry, credibility with the Banks and if possible, experience in your field of business. Negotiate an appropriate fee structure with the rescue practitioner. Use a practitioner with the time capacity to devote to the rescue and one who ideally, is based in your jurisdiction.

In advance, speak to your major creditors including your Bank, explain the position honestly and openly and get them on your side. No Bank likes the surprise of business rescue. If forewarned, the major creditors are likely to be more supportive. Remember for any business rescue plan to succeed, it needs to be supported by 75% of the creditors.  If your Bank is your largest creditor without its support, there would be little point in going into business rescue and incurring the costs. 

Speak to and engage with your staff. You will be surprised how committed they are to the rescuing the company and the ideas they have about improving the situation. Voluntary retrenchment pays moratoriums (for all staff including directors) are all issues that should be discussed in an open and frank manner. 

Work out in advance the cash needed to fund the business while in business rescue.  Business rescue generally takes between 6 to 9 months to complete.  During that period, you will need to pay overhead expenses, rental, staff costs and business rescue practitioner’s costs. Alternatively, you need to obtain post commencement finance, known in the industry as “PCF” funding. Some banks have specialist PCF funding products available. Do you have unencumbered security to offer against the PCF funding? Has your book debt already been ceded to your Bank as security? 

Apply your mind to how the company will fund itself while in business rescue. The rescue practitioner is entitled to suspend some payment obligations of the company which should assist cash flow, but your suppliers are likely to put the company on a cash only basis. How will you be able to deal with that, do you have stock in trade to last and will you be able to continue trading?

If the company does not have the cash to continue trading and closes its doors you will see an immediate loss of customers and consequently, the prospects of a successful rescue will soon dissipate.  

The net result will be a company having to force sell its assets either though a wind down rescue process or through liquidation. That will be a poor result for the company and its stakeholders. In my experience these are the basic “do’s and don’ts” for business rescue; a company rescued is better than a company lost!